Earlier this month, China took a big step to expand the use of renminbi for cross-border payments and trade settlement. The move makes it easier for international corporations to pay more of their Chinese suppliers in RMB and allows those with subsidiaries engaged in manufacturing and exporting in China to include RMB as a strategic currency in their treasury portfolios, says Sam Xu, executive director at J.P. Morgan Treasury Services.
The People’s Bank of China announced March 2 that it would extend eligibility to collect cross-border renminbi payments far beyond the 67,000 exporters that were included in the Mainland Designated Enterprises (MDE) list established in December 2010, Xu explains. All companies in China that have import/export licenses will be allowed to settle in RMB with buyers or sellers outside of China unless they appear on an exceptions roster of “enterprises under close supervision,” which replaces the MDE list, says Xu, pictured at right.
“That means the eligibility will be expanded dramatically, given the size of China’s import/export sector,” he says. “It’s a huge number.”
Often U.S. companies wanted to pay for goods in yuan instead of U.S. dollars, but were unable to do so because their suppliers were not on the original MDE list, Xu says. With this change, “U.S. sourcing companies should be able to cross-check the exception list and if the supplier is not on it, then they will be able to make RMB payments into China right away,” he says. The municipal level of government is charged with compiling the new list of companies that require close monitoring, says Xu, who predicts that process to take one to two months.
“The general message is ‘Stay tuned,’” he says. “This is new. It will take some time to figure out, but the time is imminent.”
Meanwhile, U.S. companies could save a bundle by paying in yuan instead of dollars, according to a survey of 1,000 Chinese companies conducted by global payments services provider Western Union. The survey revealed that 36% prefer to be paid in yuan, but 42% of those companies are reluctant to broach the subject with U.S. companies.
“The U.S. is the number one destination for companies based in China,” says Alfred Nader, vice president of corporate strategy and development for Western Union Business Solutions. More than 20% of the Chinese companies cite exporter convenience and reduced foreign exchange risk as the main reasons for their preference to be paid in yuan. Chinese companies also perceive the U.S. as less willing to settle in yuan (42%) than European companies (23%).
“In reality, what we found was that on average the Chinese are adding 3% to every invoice to cover their foreign exchange risk,” Nader says. Western Union Business Solutions extrapolates that paying their suppliers in yuan instead of dollars would have saved U.S. companies as much as $2.4 billion in such fees in 2011.
For a recent look at the economic, political and cultural shifts that could complicate doing business in China, see Change Grabs China.